A plan to lower the cap on federally backed mortgages may hit home buyers particularly hard in several pockets of the country, new data shows. The Federal Housing Finance Agency plans to reduce the maximum size of mortgages backed by Fannie Mae and Freddie Mac this January. The current limits are $417,000 in most parts of the country and up to $625,500 in more expensive markets. The agency hasn't announced how much it will lower loan caps, but data compiled for MarketWatch by Lender Processing Services, a mortgage-data tracking firm, shows that a decline of just $25,000 from the current...

The purpose used to be to expand the amount of money available for lending. Freddie and Fannie would sell bonds and those bonds would be used to purchase or guarantee private mortgages.

The world is much different now.

1. Private mortgage bonds are now a liquid market separate from Freddie and Fannie.
2. There's an ocean of cash just begging for returns at ridiculously low rates.
3. The federal reserve is donating money to mortgage bonds.

As a result what used to be a private money premium has now shrunk to zero.